Investment Commentary - April 2021 - CWBWEALTH.COM - CWB Wealth Management
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Investment Commentary April 2021 CWBWEALTH.COM OBSESSED WITH YOUR SUCCESS ™
Inside Delayed Take-Off.........................2 Fixed Income.............................3 Canada......................................4 U.S......................................... 5-6 International.............................. 7
Delayed Take-Off
Scott Blair, CFA
Chief Investment Officer
One of the most frustrating things about flying is the delays. Strong growth often brings talk of inflation and, of course, that’s a
We’re usually excited to get to our destination, and the last thing realistic fear and is getting a lot of media coverage. Undoubtedly,
we want to hear is that takeoff has been pushed back by a few we’ll see pockets of inflation. Just as we saw shortages of some
hours. This kind of anticipation is analogous to our current goods over the past year because we all demanded the same
situation in Canada. stay-at-home products, we’ll likely see shortages again as our
demands shift to the re-opening products and services.
Vaccines are being distributed, the weather is getting nicer, we’re
excited to get out of the house and back to our regular activities Of course, businesses that were hurt the most from being locked
– but we’re now being told to wait little bit longer! At the time of down will also benefit the most from re-opening, and there should
SVX Index SGX Index
writing this, Ontario is signalling a return to lockdown and BC is be strong demand for workers in these spaces which could lead
170
once again restricting indoor dining. Other jurisdictions, both here to wage inflation. Although we don’t see runaway inflation anytime
160
and abroad, are again looking to tighten up amid rising COVID-19 soon, we do think it will rise to more normal levels and could
150
variant cases. overshoot to the high side.
140
130
Although disappointing, we view this as a detour on the return to The past twelve months have been fantastic for major stock
120
normal road – not something that’s taking us off course. markets - many of which are up 40 or 50%. Though it’s highly
110
100
unlikely that we’ll see 50% returns in the next twelve months, we
90
“We now have a template for what are positive
more
/3
1
0
0 /
0 on the
1 /
0
/2 economically-sensitive
0 /
markets
0
1 /
0 and
02 202 202 202 202 202 202 202 202 202 /20
1 /
0 see
/3 5/3 6/3 7/3 8/3 9/3 10/3 11/3 12/3 01/
0 /
0 continued
stocks1 /
0
like0 /
0
1 /
0movement
financials
3 1
21
and 8
/2 3/3
1 towards
02 202
1
1
/2industrials.
/
return to normal looks like, and that 03 04 0 0 0 0
Over the past year, growth (stay-at-home techSource:
names)
0
performed
02 0
”
Bloomberg
is Israel. well early in the pandemic. The spread between the S&P Growth
and Value indices peaked in August, and began to narrow in
November once the vaccines became a reality. The spread has
Well over half of the population of Israel is vaccinated. Once
continued to narrow in Value’s (more economically sensitive stocks)
vaccination levels neared 40%, Israel saw a lasting drop in cases.
favour ever since (Figure 1).
That doesn’t mean the virus is gone today, but the waves and
surges have stopped. Figure 1: Growth of $100 – S&P Value vs. S&P Growth
During the recent Passover holiday, Israelis were permitted to gather S&P Value S&P Growth
in groups of 20 indoors and 50 outside. The UK is the only other 170
major country with over 40% of the population to have received at 160
least one dose of the COVID-19 vaccine. They too relaxed restrictions 150
recently with groups of six allowed to meet outside, sports facilities 140
reopening and the stay-at-home rule ending. 130
120
The U.S. should come close to a 40% vaccination rate in April. Most 110
other developed nations have 10-15% of their population vaccinated 100
(including Canada). For these countries, June is a reasonable goal for 90
meaningful relief of restrictions. However, by increasing lockdowns 0 20 0 0 20 21 02
1
202 20 202 202 20 20 2
ar ay ul pt ov an ar
now and targeting the most vulnerable populations for vaccinations, M M J
Se N J M
we could see significantly better days in May. Source: Bloomberg
So what does all this mean for our economic recovery? We still see
The second quarter of 2021 should be a transition quarter for
very strong economic growth ahead. In fact, we think this year’s
Canada. Hopefully, one that sees easing of many restrictions
growth will likely surprise to the upside. There’s enormous pent up
as we move towards the summer. Think of it like the plane on
demand, low interest rates and extremely high savings levels. It’s a
the tarmac, starting to move slowly forward at first before
powerful combination, with reopening being the catalyst to unleash
accelerating into takeoff.
the growth. We’re already seeing businesses anticipate the recovery,
with Canada’s major airlines announcing a more normal summer
schedule for instance.
2
Fixed Income
WATCHING
Understandably, investor sentiment is biased towards a strong
recovery and a return to normal. Investors feel that there is a point Malcolm Jones, MBA, CFA
where central bankers will be able to stop being accommodative. Senior Portfolio Manager
The European Central Bank is forecasting a slower recovery in
Europe, and thus sees accommodation staying in place for longer.
The Fed is seeing good growth in U.S. They have expressed a desire
to allow the economy to “run hot” in order to see some inflation. With Canada and the U.S. showing strong relative economic
In particular, they have noted a desire to make sure the recovery growth, and with high yields (relative to other developed nations),
benefits all Americans, including those more vulnerable citizens there is pressure for international investment money to flow towards
who saw a higher economic burden from COVID. North America. This can manifest itself in any combination of higher
bond prices, higher currency or higher equity prices. Given strong
The Bank of Canada (BoC) is seeing good growth, and a potentially
economic growth and rising inflation expectations, we feel that it is
troubling high level of central bank ownership of Canadian bonds.
unlikely that bonds will see much capital appreciation. Returns will
They have spoken of starting to reduce their bond purchases, and
come from the coupon.
may be the first central bank to start removing accommodation.
Note that the BoC is talking about slowing its buying program
rather than reversing it. DOING
Inflation is currently tame. Further, there are few immediate signs Reflecting our expectation of rising rates, we have decreased
of friction in labour markets or base commodity markets. As we our duration (exposure to interest rate movement) this quarter.
progress through a post-vaccination recovery, inflation is likely to We reduced duration in our provincial bonds. We have maintained
emerge. We are seeing increases in market expectations of future a very short duration in government bonds. With an expectation
inflation. Increased inflation expectations put upwards pressure on of rising long rates and no credit spread, our expectations for long
yields, but we expect this to be temporary. sovereign bond returns is quite poor though sovereign bonds still
play a strong role in risk control.
THINKING Credit bonds have a spread to cushion losses on long rates rising.
We feel there is opportunity to find some extra return in longer
We are expecting Canada and U.S. yield curves to continue to
dated credit bonds. With provincial bonds we feel the best risk/
move upwards, and to steepen. Both central banks have expressed
return trade off is in mid-term bonds, while corporate bonds do
reservations on raising the respective bank rates any time soon.
still offer some opportunities in long-dated bonds.
At the same time, they are noting increasing long-term economic
activity. Long term rates are likely to rise based on long term
inflation expectations. Short term rates are likely anchored
reflecting no change in the bank rate.
INVESTMENT COMMENTARY 3
Canada
WATCHING
The Canadian stock market picked up in the first quarter of
2021, right where it left off in the last quarter of 2020, by gaining Gil Lamothe, CFA
over 8%. The Canadian market skews towards smaller firms and Senior Portfolio Manager
companies that are sensitive to economic conditions, both of which
outperformed in the quarter and helped make Canada one of the
top performing markets worldwide. Two of the top performing
sectors within the market were Energy (up 20%) and Financials
(up almost 14%) both of which benefitted from an improving
DOING
economic outlook. Canadian banks reported strong earnings as
excess provisions for anticipated bad loans, resulting from the The early signs of global post-pandemic recovery mean strong
pandemic, are now being reversed. Loan repayments and credit demand for basic materials, primarily in Asia. We expect this to
are good. Furthermore, the banks also saw growth in most or all continue in the short to medium term, and it gives us confidence
of their retail banking, wealth management and capital markets in both the materials and energy sectors.
businesses. Improving fundamentals at our banks is a positive We have added Methanex and Nutrien over the past few months.
sign for economic growth in our economy. Both companies convert raw materials into value-added products
that are used as feedstocks in other industries. Methanex converts
natural gas into methanol, which is used in a variety of chemical
THINKING
industries and as a fuel additive. Nutrien is a fertilizer producer and
The Canadian equity market is up over 40% in the last year. retailer, supplying both potash and ammonia fertilizers internationally.
Ordinarily, such returns would make us somewhat cautious, These companies have management strength in both operations and
however, there are a couple of mitigating factors this time distribution, and give us exposure to global recovery and demand
around. First, March 2020 was a historic downturn in the market. growth at a basic level. We have also recently added Suncor back
If we go back fifteen months instead of twelve, the returns are to the portfolio, increasing our exposure to energy producers.
not as exceptional. Second, valuations are high but reasonable
when you consider how low interest rates are. Finally, we are on In concert with this, we have reduced our exposure to gold miners.
the cusp of what we believe are two great years of economic The pandemic-induced fear that was driving the price of gold has
growth ahead. As stated above, this is a good environment for largely dissipated. We continue to hold Agnico Eagle (AEM) as a
the Canadian market. best of breed gold miner in Canada.
With the strong performance in banks, we have added Bank of
Montreal (BMO) to the portfolio. BMO had particularly strong
results this quarter, and offers some unique exposure to the
U.S. commercial lending market.
INVESTMENT COMMENTARY 4
U.S.
WATCHING
The U.S. economy outperformed most developed economies
Liliana Tzvetkova, CFA
in Q1 thanks to aggressive vaccination campaigns and additional
Portfolio Manager
fiscal support. The U.S. is ahead of most countries on the
vaccination front and its fiscal policy has been more generous
than elsewhere.
Many states saw some form of easing in lockdown measures
and the $1.9 billion relief package signed into law on March
11 has already resulted in an uptick in consumer spending and
Saket Mundra, CFA, MBA
confidence. Retail, dining, and hospitality businesses that have
Portfolio Manager
recently reopened saw significant increase in demand, with
restaurant occupancy getting closer to pre-pandemic levels.
Turning to the equity markets, the rally continued into 2021,
with the S&P 500 up 5.8% (4.4% in CAD) in Q1. The rally that
started a bit over a year ago has been extraordinary, and while
stock participation was initially more focused in certain stocks
and sectors (FANGs, Technology), we are now witnessing much
broader equity participation.
The rotation from defensives to cyclicals and from growth
to value started in November of last year, and continued
throughout the first quarter. For the first time since 2016,
we have seen a long stretch of value outperforming growth
(to clarify, we’re only talking about is six months).
INVESTMENT COMMENTARY 5
THINKING
We continue to expect a strong economic recovery throughout The rotation from defensives to cyclicals is not surprising
the year, barring any hiccups due to variant strains of COVID-19 considering these sectors will benefit the most as expansion
or other external shocks. The Q4 earnings season was strong with advances. These sectors also lagged last year, and for some,
earnings and sales both increasing 4% year over year, significantly even longer. We expect this rotation to continue with valuations
higher than what was expected with a large share of companies remaining attractive. If the economic recovery proves to be
beating expectations. stronger than anticipated, it will likely mean stronger earnings than
expected for value/cyclical stocks – which is positive for share
Furthermore, comments from management teams were largely
prices. With the significant increase in long-term government yields,
positive and supportive of strong growth. The market is expecting
the yield curve has steepened, which is bullish for bank earnings
earnings per share (EPS) to grow 24% and 15% in the next two years.
and returns.
This bodes well for U.S. equities and we expect stocks to do well,
especially if the Fed stays put and does not increase interest rates,
which is what they have telegraphed.
DOING
The rotation to value and away from growth helped our U.S. Finally, we also added two new names to the U.S. portfolio –
holdings this quarter. We increased our weight in banks and Cintas and Waters. Cintas is the largest uniform rental provider in
economically sensitive sectors and trimmed our exposure in the U.S., with a history of increasing market share and generating
Utilities, Staples, and Gold. We added to names like Disney, above average returns. Waters is a health care company providing
Booking Holdings, Alphabet, and TJX, and sold our Pepsi and necessary tools in the discovery of new drugs and other materials.
P&G positions. We also used weakness in some of our long-term Both companies should benefit from the reopening of the economy.
core holdings in the Technology sector, such as Visa and
Microsoft, and added to these positions.
INVESTMENT COMMENTARY 6International
WATCHING
Although International markets lagged the US and Canadian
markets, broad indices were still up over 2% in Canadian Dollar Ric Palombi, CFA
terms in the quarter. Monetary policy continues to impact market Director of Research
dynamics as it has over the last year and decade. Interest rates are
near historically low levels. As global economies continue to recover
from the COVID-19 induced recession, central bank monetary
policies will continue to play a key role in the evolution of the overall
and intra-market performance. Cyclical companies in Europe have
DOING
outperformed defensive businesses by over 50%, from the lows in
2020. Although the recovery backdrop is conducive to continued As mentioned earlier, a steepening yield curve environment should
outperformance of economically sensitive stocks its unlikely we be beneficial for the financial sector, while an improving economic
will continue to see this level of divergence. outlook should continue to provide an earnings recovery and a
boost for cyclical companies. The portfolio continues to maintain
healthy exposure to these themes, while at the same time we have
THINKING trimmed some of our heaviest cyclical names such as Sony, Prada,
The yield curve has steepened significantly in recent months Maersk and Antofagasta to reflect their changing risk/reward profile
as longer-term yields have risen, while short-term yields have following their stock price rallies.
remained low. Despite the steepening, yields are still below prior
peaks. We believe, however, there is a real risk that yields will spike
above previous levels as central banks have indicated a willingness
to let inflation run hot as the economy heals. A steepening yield
curve should be beneficial for cyclical companies and Europe,
which is a pro-cyclical market.
We believe that an improving macro-outlook and a higher
inflationary regime should provide a material earnings boost for
cyclical names where earnings projections have not recovered
to pre-pandemic levels.
INVESTMENT COMMENTARY 7CONNECT WITH US CWB Wealth Management provides clients with financial peace of mind. 1.855.292.9655 | info@cwbwealth.com. STAY AHEAD OF THE CURVE If you would like to receive our publications directly to your inbox, you can subscribe by visiting cwbwealth.com/subscribe or by emailing info@cwbwealth.com. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth Management (CWB WM) or its affiliates. CWB WM does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CWB WM uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/about-us/legal-disclaimer for our full disclaimer. Fees charged for the services provided by CWB WM and its affiliates may change from time to time, 60 days’ notice will be provided to clients in advance of any changes. CWBWEALTH.COM OBSESSED WITH YOUR SUCCESS ™
You can also read
